1. Field of the Invention
The present invention, relates to a system and method for funding via a prepaid card (e.g., a stored value card or gift card) financial products including federal and state regulated securities (e.g., stocks, bonds, mutual funds or any other instrument classified as a “security” as defined by Section 3(a)(10) of the Securities Exchange Act of 1934, as amended) and insurance intended or targeted by a purchaser at the time of purchase by non-regulated entities (e.g., entities not required to be registered or licensed as would a broker or agent in a conventional financial institution).
2. Description of Related Art
The total prepaid market in the United States in 2008 reached $247.7 billion, comprising both “open loop” and “closed loop” cards. A closed loop prepaid card is one in which the funds placed on the card is limited to use at a specified retailer(s) or with a specific sponsor of the card. So, for example, if a consumer buys a Target gift card, the funds on that card can only be used at Target stores. Gift cards are typical examples of closed loop cards.
Open loop prepaid cards may be used for multiple purposes and are equivalent to cash in that they generally have the ability to provide monetary consideration for purchases through debit or credit means using existing payment networks such as interbank networks. Pre-Paid Cards that authenticate on the Visa™ and American Express™ would be examples of open loop pre-paid cards. Open-Loop cards have broad acceptance at both retailers and Automated Teller Machines (ATMs). The intended or target product at the time of purchase by the purchaser is a cash equivalent.
As the pre-paid card market grows, these cards are being used for pre-payment of a wider array of products and services, from coffee to retail to books to electricity and restaurants. As a result, prepaid cards are now popular gifts that are given for various life occasions, for example, holidays, birthdays, weddings and other special days or events.
It would be advantageous to expand the use of prepaid cards to the funding of financial products including regulated insurance (e.g., life insurance, health insurance, home insurance, disability insurance, variable annuity) and federal or state regulated securities as defined by Section 3(a)(10) of the Securities Exchange Act of 1934, as amended. The term “security” is defined under the Act to mean “ . . . any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” Pursuant to the Securities Exchange Act of 1933, no security may be offered or sold to the public unless the broker, sponsor, issuer or sales agent complies with all regulations under the Act.
Heretofore, open loop gift cards have been offered wherein the intended or targeted product of the card bought by the purchaser at the time of purchase is a cash equivalent to be applied by the customer or user, as desired. Since the intended or targeted product at the time of purchase by the purchaser is a cash equivalent the funds may thereafter be used, for example, for the purchase of clothes, food or any other desired product. One such permitted use by the customer is to deposit the cash allocated to such prepaid cards into a savings account subsequent to initial purchase of the card. In so doing, the customer links the prepaid debit card to a savings account established online and the funds may be transferred back and forth between the pre-paid card and the savings account subject to applicable banking regulations. The product in such cases is intended or targeted by the purchaser at the time of purchase as a cash equivalent and therefore the deposit of such cash equivalent funds by the customer into a savings account is no different than that of any other deposit of monetary funds into the savings account.
Another program is that of the UPromise™, Inc. (www.UPromise.com) rewards program, which represents itself as a “one-stop college service provider.” This program enables individuals to link pre-existing credit cards, debit cards, and loyalty cards to an established UPromise account. Regular use of these pre-existing cards then generates cash that may then be used for funding tax-advantaged 529 plans that encourage savings and investment in higher education expenses for a designated beneficiary. (See Internal Revenue Code, 26 U.S.C. §529) Through the UPromise™ service, individuals may open 529 accounts (“UPromise™ 529 Accounts”) and invest the account's value in a limited menu of mutual funds available. Conceptually, the UPromise™ service is equivalent to “rewards programs” or “cash-back programs” offered by credit card issuers except that value earned (cash equivalent) is credited to the UPromise™ 529 Account instead of as “points” to a reward program or “cash back” to the stored value or credit card account.
Accordingly, both the aforementioned savings account model and the UPromise™ 529 Account face major limitations: neither represents a prepaid card that may be used as a direct funding mechanism wherein the intended or targeted product at the time of purchase by the purchaser is a financial product. To the contrary, the product associated with these exemplary conventional cards at the time of purchase by the purchaser is itself a cash equivalent and not directly targeted or intended at the time of purchase to be applied to a financial product. This represents a significant distinction from a standpoint of complying with all federal and state statutory regulations.
As such, although the popularity and boom of prepaid cards has led to greater use and increased availability of products and services on a prepaid basis, to date such cards have never been offered wherein the intended or targeted funding at the time of purchase by a purchaser is to be applied to a financial product. There are multiple reasons for this, including:                1) Traditionally, gifting of regulated securities has been complex and confusing, and as a result, consumers and financial institutions have shied away from it;        2) Securities operate in highly regulated environments, and as a result, developing a processes for the purchase and gifting of such products in a way that complies with appropriate federal or state registration regulations is complex;        3) Financial service products have typically been sold through regulated financial institutions—not through more mainstream unregulated consumer channels in which pre-paid cards are commonly offered; and        4) Financial service and investment products in particular can be complex, and as a result, selling them through channels that do not provide a great deal of handholding requires a simplification of the process.        
Indeed, federal and state regulated securities are usually targeted to upper-middle or high net worth individuals. As a result, the processes and methods traditionally used for selling these regulated securities have been limited in channel and reach. An unintended byproduct of this approach has been that a significant number of potential customers have often been excluded from participation, or their participation has been more limited than it otherwise might have been. For example, one substantial segment of the population generally not targeted is the “underbanked” population, which is estimated to include approximately 40 million households in the United States. Underbanked individuals either do not have regular bank accounts or rely heavily on non-traditional financial channels such as check cashing stores, payday loan retail outlets, or financial products at supermarkets, drugstores or similar channels. Because regulated securities and insurance most often have been sold through authorized sales agents that need to be registered or licensed either at the federal or state level (e.g., bank channels, broker-dealers, or financial planners), customers such as the underbanked who for various reasons do not feel comfortable using these channels are left out. Therefore, adoption of such regulated securities by these potential customers remains low. A system and method for the sale of prepaid cards through an unregulated entity (i.e., a sales agent that need not be registered or licensed as would a broker or agent in a conventional financial institution) wherein the prepaid card is intended or targeted at the time of purchase by the purchaser to fund a financial product is desirable in order to expand access to such products by this customer segment.
Beyond the underbanked segment of the population, most individuals in the United States participate in mutual funds via 401(k) plans offered through employers but participation by them outside of these plans remains more limited.
At the same time, heretofore mainstream and underbanked consumers of relatively modest financial means have often been ignored by traditional financial institutions, especially when it comes to regulated securities and insurance, on the basis that such consumers are simply unprofitable clientele given the traditional cost structure of providing such financial products.
It is therefore desirable to develop a method and system for the funding of a financial product as the intended or targeted product at the time of purchase by the purchaser via prepaid cards that addresses these key challenges while complying with all statutory regulations.